Tuesday, August 21, 2018

A VERY FOOLISH IDEA!!

In this week's message we reiterated our position that a protracted trade war "would indeed lead ultimately to a serious global recession."In our weekly message on 8/5 we warned that :

"....we could ultimately get to the point where momentum has completely shifted, leaving a contraction imminent; at which time an end to the trade nonsense would not turn the tide, as that train will have already left the station."

We're definitely not kidding!

From Bloomberg this morning: emphasis mine

History tells us trade wars are easy to start and hard to stop, just like real ones. There’s a reason for that. The material stakes become greater as hostilities continue. And the domestic political cost of backing down gets higher and higher.

The traded sector represents some 38 percent of Chinese GDP and 27 percent of U.S. GDP. If the current, small-scale dispute escalates to cover the entire $650 billion in bilateral trade, the world will have an objective economic problem on its hands, not just one of general market sentiment.

Once growth numbers start declining, however marginally, it won’t take all that much for sentiment, and then the real economy, to head south. Falling sentiment and economic numbers will contribute to a mutually reinforcing spiral.

There’s a foolish idea in some quarters of the U.S. that because China exports nearly $500 billion to the U.S. and the U.S. exports only $150 billion in return, there’s a limit to the impact Chinese retaliatory tariffs can have.